Dated: June 1, 2022 Benda Pref — 2 Brenda Moody Whinery, Bankruptcy Judge 3 5 6 7 UNITED STATES BANKRUPTCY COURT 8 DISTRICT OF ARIZONA 9 In re: Chapter 7 FARWEST PUMP COMPANY, Case No. 4:17-bk-11112-BMW I Debtor. RULING AND ORDER REGARDING 2 □□ □□ MD SERENE WITH JOEL RODRIGUEZ, ET AL. 13 (DKT. 866) 14 15 Before the Court is the Trustee ’s Motion to Approve Compromise and Settlement with Joe 16] Rodriguez, et al. (the “Settlement Motion’’) (Dkt. 866) filed by Christopher Linscott, the Chapte 17] 7 Trustee (the “Trustee’’), in which the Trustee asks the Court to approve a settlement agreemen (the “Settlement’) between the Bankruptcy Estate (the “Estate”) and certain parties to pre petition state court litigation. Creditor Beach Fleischman, PC (“Beach Fleischman’) objects t 20 || the Settlement on the basis that there is an offer by former creditor David Leonard (““Leonard” to purchase certain of the claims that the Trustee is proposing to settle (the “Leonard Offer”) (Dkt. 883). Beach Fleischman argues that, as compared to the Settlement, the Leonard Offe 23 | would provide a better return to creditors of the Estate. 24 After a series of preliminary hearings, the Court held an evidentiary hearing on th 25 || Settlement Motion on May 12, 2022, at which time testimony was provided by the Trustee an 26|| Leonard. At the conclusion of the evidentiary hearing, the parties declined an offer to submi post-trial briefs, and the Court took the matter under advisement. The Court now issues its ruling 28
1 I. Jurisdiction 2 The Court has jurisdiction over this matter pursuant to 28 U.S.C. §§ 1334 and 157. This 3 is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(A). The following constitute the Court’s 4 findings of fact and conclusions of law pursuant to Federal Rule of Civil Procedure 52, as 5 incorporated by Federal Rule of Bankruptcy Procedure 7052, and made applicable to contested 6 matters by Federal Rule of Bankruptcy Procedure 9014(c). 7 II. Factual and Procedural Background 8 On January 28, 2015, Farwest Pump Company (“Farwest” or the “Debtor”), filed an action 9 against Joel Rodriguez, Lawrence Rodriguez, Mark Skokan, Ann M. Rico-Skokan, Darlene 10 Rodriguez Krueger (“Krueger”), Doug Dunlap, Christina Dunlap (also known as Tina Dunlap), 11 High Desert Irrigation (Doug Dunlap, Christina Dunlap, and High Desert Irrigation are 12 collectively referred to as the “Dunlap Parties”), and Joyce E. Larson (collectively with the 13 above-named parties, the “Settling Parties”) in Pima County Superior Court (the “State Court 14 Action”).1 (Dkt. 946 at 3, ¶ 1). The Dunlap Parties asserted counterclaims against Farwest, and 15 Farwest tendered its defense of the Dunlap Parties’ counterclaims to Secura Insurance Company 16 (“Secura”), which accepted the defense under a reservation of rights. (Dkt. 946 at 3, ¶ 2). 17 Farwest’s principals, Clark and Channa Vaught (the “Vaughts”), are also parties to the State 18 Court Action. The factual disputes underlying the State Court Action relate to actions that took 19 place between 1998 and 2013. (Dkt. 954 at ¶ 3). 20 On September 20, 2017, Farwest filed a petition for relief under Chapter 11 of the 21 Bankruptcy Code (the “Petition Date”). (Dkt. 1). In its schedules, Farwest valued its claims in 22 the State Court Action at $3 million. (Dkt. 946 at 4, ¶ 7; Dkt. 82). An Official Committee of 23 Unsecured Creditors (the “Committee”) was appointed shortly after the Petition Date. (Dkt. 49). 24 On December 19, 2017, Farwest removed the State Court Action to this Court. (Adv. Dkt. 25 1).2 26
27 1 Although additional parties were named in the State Court Action, the Settling Parties are the only remaining litigants against whom the Estate has asserted claims. 28 2 “Adv. Dkt.” refers to docket entries in the removed action, adversary case number 4:17-ap-00815- 1 On April 17, 2018, this Court issued an order remanding the State Court Action to the 2 Pima County Superior Court for liquidation of the claims asserted therein. (Adv. Dkt. 23). 3 On November 4, 2020 (the “Conversion Date”), this case was converted to Chapter 7, and 4 the Trustee was appointed thereafter. (Dkt. 798). 5 The Trustee is not aware of any material effort by the Debtor or the Committee to resume 6 litigation of the State Court Action while this case was pending in Chapter 11. (Dkt. 954 at ¶ 4). 7 Since the Conversion Date, the Trustee has likewise not made any material effort to resume 8 litigation of the State Court Action. 9 Before this case was converted to Chapter 7, the State Court Action was scheduled for an 10 estimated 20-day trial to begin on March 17, 2020. (Dkt. 946 at 5, ¶ 11). However, after 11 conversion of the case, the State Court Action was stayed. (Dkt. 946 at 5, ¶ 13). A new trial date 12 has not been set, and the Trustee believes that in the event litigation were to continue, it is unlikely 13 that a trial would begin until sometime in 2023. (Dkt. 954 at ¶ 10). 14 As of the Conversion Date, Leonard was a creditor of this Estate. (See Dkt. 444). However, 15 on March 26, 2021, the Court approved a settlement between the Estate and Leonard, pursuant 16 to which Leonard’s claims against the Estate were deemed fully satisfied in exchange for the 17 Estate’s assignment of certain claims against Secura (the “Secura Claims”) to Leonard. (Dkt. 18 842; 5/12/2022 Trial Tr. 16:21-24, 36:25-37:5). As a result, Leonard is no longer a creditor of 19 this Estate, but Leonard holds the interest in the Secura Claims and is pursuing recovery on the 20 same. (Dkt. 842; 5/12/2022 Trial Tr. 16:21-22, 36:25-37:8, 37:20-22). 21 A. Claims of the Estate 22 The Estate’s remaining claims against the Settling Parties include breach of fiduciary duty, 23 breach of contract and bad faith, constructive fraud, fraud, and negligent misrepresentation 24 claims. (Dkt. 946 at 4, ¶ 5). Included in these remaining claims are aiding and abetting and 25 racketeering claims the Estate has asserted against the Dunlap Parties, which claims have 26 survived summary judgment. (Dkt. 946 at 4, ¶ 5). 27 Pertinent to any claims of the Estate against Krueger, in June 2017, Krueger filed a 28 1 personal Chapter 13 bankruptcy case. Krueger included Farwest on her Schedule E/F as holding 2 a contingent, unliquidated, disputed claim in the amount of $0, but Farwest did not file a proof 3 of claim in that case. (See Kr. Dkt. 4 at 4).4 Farwest did, however, file a non-dischargeability 4 action against Krueger pursuant to 11 U.S.C. §§ 523(a)(2), (a)(4), and (a)(6), which action 5 remains pending (the “Krueger Adversary”). (Dkt. 946 at 4, ¶ 6). 6 B. Claims Against the Estate 7 The Dunlap Parties have filed a proof of claim in this case in the amount of $305,957 on 8 account of and relating to their remaining counterclaims in the State Court Action. (Dkt. 946 at 9 4, ¶ 8; Proof of Claim 23-1). The parties agree that it is possible some of the claims asserted by 10 the Dunlap Parties against the Debtor in the State Court Action may be covered by Farwest’s 11 Secura insurance policy. (Dkt. 946 at 4, ¶ 9). The Dunlaps have indicated that they may assert 12 additional claims against the Estate, including potential administrative expense claims. (Dkt. 946 13 at 4, ¶ 10). However, the Dunlaps have not liquidated these amounts, amended their proof of 14 claim to include these amounts, or filed an administrative expense claim. (Dkt. 946 at 4, ¶ 10). 15 Krueger has filed a proof of claim in this case in the amount of $80,000 for attorneys’ 16 fees. (Dkt. 946 at 5, ¶ 14; Proof of Claim 27-1). However, in her personal bankruptcy case, 17 Krueger did not schedule any claims against Farwest. (See Dkt. 946 at 5, ¶ 15; Kr. Dkt. 4). 18 Aside from the Dunlap Parties and Krueger, none of the other Settling Parties has filed a 19 claim in this bankruptcy case. (5/12/2022 Trial Tr. 18:15-18). Further, no Settling Party formally 20 asserted an administrative expense claim prior to the Chapter 11 administrative claims bar date. 21 (See Dkt. 857; Dkt. 946 at 4, ¶ 10; 5/12/2022 Trial Tr. 18:15-18). 22 III. The Competing Proposals 23 A. The Trustee’s Settlement 24 Under the Trustee’s Settlement, the Estate’s claims against the Settling Parties would be 25 released in exchange for complete satisfaction of all claims asserted by the Settling Parties against 26 the Estate, including the $305,957 proof of claim filed by the Dunlap Parties and the $80,000 27 3 See In re Krueger, 4:17-bk-07553-SHG (Bankr. D. Ariz. 2017). 28 4 “Kr. Adv. Dkt.” refers to the docket in the Krueger bankruptcy case, case number 4:17-bk-07553-SHG 1 proof of claim filed by Krueger, which claims represent approximately 25% of the general 2 unsecured claims filed in this case. (Dkt. 866; 5/12/2022 Trial Tr. 10:1-3). 3 Neither the Vaughts nor their non-debtor affiliates are parties to the Trustee’s Settlement. 4 (Dkt. 946 at 6, ¶ 18; Dkt. 954 at ¶ 17). As such, any claims that any of the Settling Parties, 5 including the Estate, have against the Vaughts or any of their affiliates are fully reserved and 6 unaffected by the Trustee’s Settlement. (Dkt. 946 at 6, ¶ 18; Dkt. 954 at ¶ 17). Nevertheless, the 7 Settlement would resolve all claims of and against the Estate in the State Court Action.5 8 B. The Leonard Offer 9 Under the Leonard Offer: (1) Leonard would pay the Estate $25,000 for an assignment of 10 the Estate’s claims against the Dunlap Parties and Krueger; and (2) “Leonard, individually and 11 through his entity, would indemnify the Estate for any amounts that the Estate would have to 12 distribute on account of any allowed claims of the Settling Parties” (the “Indemnification”). (Dkt. 13 946 at 2).6 14 Leonard has clarified that the Indemnification would cover: (1) the pro-rata portion of any 15 and all of the pre-conversion claims of the Dunlap Parties and Krueger against the Estate; and 16 (2) any post-conversion claims that the Dunlap Parties and Krueger could have against the Estate, 17 provided that such claims could not have been filed before the Chapter 11 administrative claims 18 bar date. (Dkt. 953 at ¶¶ 3-4). The Indemnification would not, however, cover “administrative 19 expenses incurred [by] the Trustee related to the Bankruptcy case.” (Dkt. 953 at ¶ 5). 20 Further, when the Trustee is in a position to make a distribution to unsecured creditors, 21 Leonard proposes to post a bond in the amount that the Krueger and the Dunlap Parties would 22 receive from the Estate as part of that distribution, based upon their filed proofs of claim. (Dkt. 23 946 at 7, ¶ 26; 5/12/2022 Trial Tr. 41:22-24). 24 25
26 5 There are no claims of the Estate pending against the Vaughts in the State Court Action. (Dkt. 953 at ¶ 10). 27 6 Counsel for Beach Fleischman and Leonard suggested during the evidentiary hearing that there were higher and better offers proposed to the Trustee during negotiations, over and above the Leonard Offer 28 that has been presented to the Court. (See 5/12/2022 Trial Tr. 31:12-32:19). Any such offers are not 1 IV. Issue 2 The issue before the Court is whether the Trustee has properly exercised his business 3 judgment in proceeding with the Settlement, rather than the Leonard Offer.7 4 V. The Positions and Arguments of the Parties 5 A. Trustee’s Position 6 The Trustee asserts that for a number of reasons, his proposed Settlement provides a 7 resolution of the issues that is preferable to the Leonard Offer. The Trustee states that he reached 8 the Settlement and filed the Settlement Motion following an investigation of the merits of the 9 Estate’s claims in the State Court Action, an investigation of the proofs of claim filed by the 10 Dunlap Parties and Krueger, and discussions about the pending litigation with the Estate’s 11 material stakeholders. (Dkt. 946 at 5, ¶ 17; see also 5/12/2022 Trial Tr. 9:20-11:16). Specifically, 12 the Trustee did the following in connection with his negotiation of the Settlement: 13 a. Analyzed publicly available documents pertaining to the State Court Action; 14 b. Analyzed publicly available documents filed in the Krueger Adversary; 15 c. Analyzed an expert report dated August 24, 2017 that was prepared to aid the 16 Debtor in analyzing the counterclaims made by the Dunlap Parties and others; 17 d. Analyzed the Debtor’s books, records, and schedules; 18 e. Analyzed the claims register and the proofs of claim filed by the Dunlap Parties 19 and Krueger; 20 f. Held meetings and interviews with multiple stakeholders in this bankruptcy 21 case, including: (i) Leonard; (ii) representatives of and/or counsel for The 22 Morgan Rose Ranch, L.P., BMR III, L.P., and ANC Orchard, LLC 23 (collectively, the “Morgan Ranch Creditors”), which hold some of the largest 24 general unsecured claims in this case; (iii) former counsel to the Committee; 25 (iv) the Vaughts; and (v) counsel for the Dunlap Parties; 26 g. Analyzed the Leonard Offer; and 27
28 7 The parties have phrased the issue as whether the Trustee’s choice to proceed with the Settlement as 1 h. Held discussions with representative(s) of Secura regarding Farwest’s defense 2 of the counterclaims asserted by the Dunlap Parties in the State Court Action. 3 (Dkt. 954 at ¶ 2; 5/12/2022 Trial Tr. 9:20-11:16). 4 In terms of the value of the litigation, although the Debtor ascribed a $3 million value to 5 the Estate’s claims in the State Court Action, the Trustee has found the Debtor’s schedules to be 6 unreliable. (Dkt. 954 at ¶ 11). Based upon his analysis, the Trustee believes it would take 7 substantial time and cost to resume the State Court Action and litigate objections to the claims 8 asserted by the Dunlap Parties and Krueger in this bankruptcy case. (Dkt. 954 at ¶ 5). Further, 9 the Trustee asserts that the Estate’s limited resources complicate the Estate’s ability to pursue 10 litigation. (Dkt. 954 at ¶ 7). 11 It is the Trustee’s position that the proposed satisfaction of the Krueger and Dunlap 12 Parties’ claims under the terms of the Settlement would materially benefit the Estate by reducing 13 the pool of general unsecured claims by approximately 25%, and thereby increase recoveries for 14 the holders of the remaining allowed claims. (Dkt. 954 at ¶ 6; 5/12/2022 Trial Tr. 17:8-14). 15 In comparing the Settlement against the Leonard Offer, the Trustee asserts that general 16 unsecured creditors would receive an estimated 39% return on their claims if the Settlement is 17 approved. (Dkt. 954 at ¶ 8; TE 11;8 5/12/2022 Trial Tr. 13:18-14:21). By contrast, the Trustee 18 asserts that general unsecured creditors would receive an estimated 36% return in the event the 19 Settlement is not approved, and the Leonard Offer is pursued. (Dkt. 954 at ¶ 9; TE 12;9 5/12/2022 20 Trial Tr.14:22-16:7). The Trustee attributes this lower estimated return to creditors under the 21 Leonard Offer primarily to costs the Estate would incur while waiting for Leonard to conclude 22 the claims litigation in the State Court Action. (Dkt. 954 at ¶¶ 9, 13-14). Specifically, the Trustee 23 assumes: (1) an additional $15,000 in legal fees to monitor and coordinate the litigation with the 24 Dunlap Parties; (2) an additional $2,500 in operating expenses to keep this bankruptcy case open; 25 and (3) an additional $1,000 in trustee fees given the funds that the Estate would acquire under 26
27 8 TE 11 is also Exhibit A to the Declaration of Christopher Linscott in Support of Trustee’s Motion to Approve Compromise and Settlement Agreement with Joel Rodriguez, et al. (Dkt. 954). 28 9 TE 12 is also Exhibit B to the Declaration of Christopher Linscott in Support of Trustee’s Motion to 1 the Leonard Offer. (5/12/2022 Trial Tr. 15:4-19, 22:13-23:1; TE 12). 2 The Trustee does not believe Leonard’s offer to indemnify the Estate and post a bond 3 would benefit the Estate given the Trustee’s understanding that he would not be able to close this 4 case until such time as the Krueger and Dunlap Parties’ claims are fully and finally resolved. 5 (Dkt. 954 at ¶ 14; 5/12/2022 Trial Tr. 17:5-7, 26:5-6). 6 Further, according to the Trustee, counsel for the Dunlap Parties has asserted that 7 continued litigation of the State Court Action, even by Leonard, could give rise to administrative 8 claims against the Estate for, among other things, vexatious litigation. (Dkt. 954 at ¶ 9). It is the 9 Trustee’s understanding, and it has not been refuted, that the Estate, and not Leonard, would be 10 responsible for any such administrative claims. (See Dkt. 954 at ¶ 9). 11 Ultimately, the Trustee decided to move forward with the Settlement due to the 12 complicated and protracted nature of the State Court Action, the Trustee’s assessment of the 13 Estate’s claims against the Settling Parties, the immediate benefit to the Estate resulting from the 14 satisfaction of the Krueger and the Dunlap Parties’ claims, the complexities and uncertainties 15 surrounding the Leonard Offer, and in light of support from key stakeholders. (Dkt. 946 at 8, 16 ¶ 29). 17 The Trustee asserts that given the foregoing, based upon his business judgment, the terms 18 of the Settlement reflect a fair and equitable compromise of the State Court Action, Krueger 19 Adversary, and Krueger and Dunlap Parties’ claims that is better for creditors and the Estate than 20 the Leonard Offer. (Dkt. 954 at ¶ 21). 21 B. Beach Fleischman’s Position 22 Beach Fleischman argues that the Leonard Offer represents a higher and better offer than 23 the Trustee’s Settlement given that it provides for $25,000 in immediate cash to the Estate and 24 contains an indemnification provision. In Beach Fleischman’s view, the Leonard Offer would 25 provide for the same end result as the Settlement, plus an additional $25,000 in cash. (See Dkt. 26 953 at ¶¶ 1, 2 & 6; 5/12/2022 Trial Tr. 28:9-18). Beach Fleischman, through Leonard, further 27 suggests that the counterclaims raised by the Dunlap Parties against Farwest in the State Court 28 Action are without merit. (5/12/2022 Trial Tr. 30:18-31:3). For these reasons, Beach Fleischman 1 contends that the Trustee’s decision to move forward with the Settlement Motion constitutes an 2 abuse of the Trustee’s business judgment. 3 Beach Fleischman, through Leonard, takes the position that any protracted litigation 4 resulting from the Leonard Offer would not impact the administration of the Estate, because it is 5 Leonard’s understanding that if his offer is approved, the Trustee may close the Estate at any 6 time, at which point Leonard would post a bond to cover any distribution to which the Dunlap 7 Parties and/or Krueger would be entitled. (Dkt. 953 at ¶ 8). Leonard has also opined that, despite 8 the fact that the Indemnification does not cover administrative expenses incurred by the Trustee, 9 there would be no administrative costs to the Estate related to his proposed assignment of the 10 claims. (Dkt. 953 at ¶ 12). 11 C. The Positions of Other Creditors 12 The Trustee has represented to the Court that the Morgan Ranch Creditors, which hold 13 three of the largest general unsecured claims in this case comprising approximately 81% of the 14 general unsecured class, support the Settlement over the Leonard Offer. (Dkt. 954 at ¶ 12; 15 5/12/2022 Trial Tr. 10:7-20). 16 Other than Beach Fleischman, no other party in interest objected to the Settlement Motion. 17 VI. Legal Analysis and Conclusions of Law 18 Federal Rule of Bankruptcy Procedure 9019 authorizes a bankruptcy court to approve a 19 compromise or settlement in a pending bankruptcy case. 20 The Ninth Circuit has determined that “there must be more than a mere good faith 21 negotiation of a settlement by the trustee in order for the bankruptcy court to affirm a compromise 22 agreement.” Martin v. Kane (In re A & C Properties), 784 F.2d 1377, 1381 (9th Cir. 1986). “The 23 court must also find that the compromise is fair and equitable.” Id. “The trustee, as the party 24 proposing the compromise, has the burden of persuading the bankruptcy court that the 25 compromise is fair and equitable and should be approved.” Id. 26 In determining the fairness, reasonableness and adequacy of a proposed settlement, the 27 bankruptcy court must consider:
28 1 (a) The probability of success in the litigation; (b) the difficulties, if any, to be 2 encountered in the matter of collection; (c) the complexity of the litigation involved, and the expense, inconvenience and delay necessarily attending it; 3 (d) the paramount interest of the creditors and a proper deference to their 4 r easonable views in the premises. 5 Id. (citations omitted). 6 “No one factor is dispositive” and “the factors should be considered as a whole to 7 determine whether the settlement compares favorably with the expected rewards of litigation.” 8 Skyline Ridge, LLC v. Cinco Soldados, LLC (In re Skyline Ridge, LLC), BAP Nos. AZ-20-1264- 9 BTL & AZ-21-1000-BTL, 2021 WL 3829311, at *9 (9th Cir. BAP Aug. 25, 2021) (quoting in 10 part Greif & Co. v. Shapiro (In re W. Funding Inc.), 550 B.R. 841, 851 (9th Cir. BAP 2016), 11 aff’d, 705 F. App’x 600 (9th Cir. 2017)); accord Open Med. Inst., Inc. v. Hjelmeset (In re Open 12 Med. Inst., Inc.), No. BAP NC-21-1233-FBS, 2022 WL 1711774, at *7 (9th Cir. BAP May 26, 13 2022). Because a court has discretion as to how much weight to give each of the A & C Properties 14 factors, “any one factor may have weight in isolation that justifies [a] settlement.” Tieni v. Mastan 15 (In re Bondanelli), No. BAP CC-19-1175-TaFS, 2020 WL 1304140, at *2 (9th Cir. BAP Mar. 16 18, 2020); see also In re Open Med. Inst., Inc., 2022 WL 1711774, at *11 (“a settlement can 17 satisfy the A & C Properties test even if the evidence supporting one or more of the four factors 18 is relatively weak”). Further, when assessing a settlement, the Court need not decide issues of 19 disputed fact or questions of law raised in the controversies sought to be settled. Burton v. Ulrich 20 (In re Schmitt), 215 B.R. 417, 423 (9th Cir. BAP 1997). 21 “Ordinarily, the position of the trustee is afforded deference, particularly where business 22 judgment is entailed in the analysis . . . .” Simantob v. Claims Prosecutor, LLC (In re Lahijani), 23 325 B.R. 282, 289 (9th Cir. BAP 2005). “Nevertheless, particularly in the face of opposition by 24 creditors, the requirement of court approval means that the responsibility ultimately is the 25 court’s.” Id. That being said, although creditor objections must be afforded due deference, such 26 objections are not controlling. In re A & C Props., 784 F.2d at 1382. “Unsecured creditors have 27 a voice but not a veto.” Sterling v. Green (In re Esterlina Vineyards & Winery, LLC), BAP No. 28 NC-16-1428-TaBS, 2018 WL 1354331, at *8 (9th Cir. BAP Mar. 13, 2018). 1 Ultimately, a bankruptcy court has great latitude in approving a compromise which it 2 determines to be fair and equitable. Woodson v. Fireman’s Fund Ins. Co. (In re Woodson), 839 3 F.2d 610, 620 (9th Cir. 1988). The following sets forth the Court’s application of the A & C 4 Properties factors to the Settlement. 5 A. Probability of Success in Litigation 6 The State Court Action, which involves numerous parties and claims flowing both from 7 and against the Estate, has been pending for more than seven years, involves numerous, complex 8 claims, and relates to actions and conduct which occurred more than a decade ago. Further, claims 9 on both sides of the lawsuit have survived dispositive motions. The parties do not dispute that 10 were litigation to continue, a trial would be necessary. Based upon the foregoing, the Estate’s 11 probability of success in the State Court Action is anything but certain. Likewise, given the nature 12 and overlap between the State Court Action and the status of the Krueger and Dunlap Parties’ 13 claims in this bankruptcy case, the Estate’s probability of success in any bankruptcy court 14 litigation against Krueger and/or the Dunlap Parties remains speculative. 15 Beach Fleischman, through Leonard, has suggested that the counterclaims asserted by the 16 Dunlap Parties against Farwest have little to no merit, but Beach Fleischman has not argued that 17 the Debtor’s probability of success in the State Court Action and/or pertinent bankruptcy 18 litigation is so certain as to weigh against settlement. 19 Given the totality of the circumstances and record before the Court, it is this Court’s 20 determination that the first A & C Properties factor weighs strongly in favor of approval of the 21 Settlement. 22 B. Difficulties of Collection 23 No testimony or evidence was submitted regarding any potential collection difficulties the 24 Trustee might encounter in the event litigation against the Settling Parties were to continue and 25 the Estate were to prevail, but given the number of parties involved, issues regarding collection 26 could very well arise. Further, as discussed above, the record reflects that at least one of the 27 Settling Parties against whom the Estate has a claim was a debtor in a Chapter 13 bankruptcy 28 case commenced after the State Court Action. 1 Beach Fleischman has not argued that this A & C Properties factor weighs to any extent 2 against settlement. 3 Based upon the foregoing, the Court finds that the second A & C Properties factor weighs 4 in favor of approval of the Settlement, or is at least neutral. 5 C. Complexities, Expense, Inconvenience, and Delay of Litigation 6 The claims at issue in the State Court Action and the claims involving the Settling Parties 7 in this bankruptcy case and in the Krueger Adversary are numerous, complex, and fact-intensive. 8 Additionally, the expense to the Estate of continuing litigation against the Settling Parties could 9 ultimately be prohibitive given that the Debtor’s defense costs in the State Court Action have 10 been borne by Secura under a reservation of rights, and given that the Estate is responsible for 11 all administrative expenses incurred in the context of this bankruptcy case and the Krueger 12 Adversary. Further, as noted above, the State Court Action has been pending since 2015, there 13 are no trial dates set, and there is a high likelihood of future appeals and proceedings given the 14 nature of the litigation, and the past history between the parties. Moreover, the Krueger 15 Adversary and the litigation pertaining to the Krueger and Dunlap Parties’ claims in this 16 bankruptcy case are in the initial stages. 17 Beach Fleischman has not argued that the litigation that would be resolved under the terms 18 of the Settlement is not complex or fact-intensive. Beach Fleischman, through Leonard, and as 19 reflected in the Leonard Offer, has acknowledged, that if the litigation at issue were to continue, 20 it would be complex, expensive, and protracted. The Trustee, on the other hand, testified that he 21 may be able to close this case before the end of the year if the Settlement is approved.10 22 Based upon the foregoing, it is the determination of the Court that the third A & C 23 Properties factor weighs heavily in favor of approval of the Settlement. 24 D. Interest of Creditors 25 Beach Fleischman, which holds a claim representing approximately 3 to 4% of the general 26 unsecured claims in this case,11 and which has not been an active participant in these proceedings 27
28 10 (5/12/2022 Trial Tr. 23:16-24:2). 1 other than to allow Leonard a platform to pursue the Leonard Offer, is the only creditor that has 2 objected to the Settlement Motion or supported the Leonard Offer.12 3 The record reflects that the largest general unsecured creditors in this case, which hold 4 more than 80% of the general unsecured claims in this case, and which creditors are not parties 5 to the State Court Action or any other pertinent litigation, prefer the Trustee’s Settlement to the 6 Leonard Offer. The Court must give proper deference to these creditors’ reasonable views. 7 Significant creditor support aside, Beach Fleischman suggests that the Trustee’s analysis, 8 which shows that general unsecured creditors would receive more in the event the Settlement is 9 approved than they would under the Leonard Offer, is flawed because it does not account for the 10 Indemnification. Under Beach Fleischman’s analysis, the Leonard Offer would provide a net 11 benefit to the Estate in the amount of $6,500, after deduction of the administrative and operating 12 expenses estimated by the Trustee, and as such, is in the best interest of creditors. 13 However, even assuming that Leonard would fully indemnify the Estate for any amounts 14 the Estate would otherwise be obligated to pay the Dunlap Parties or Krueger, and assuming there 15 would be no expenses stemming from the Leonard Offer over and above those estimated by the 16 Trustee, the monetary benefit to general unsecured creditors would be negligible, and would 17 result in, at most, an additional 0.5% distribution on account of allowed general unsecured claims 18 in this case. For Beach Fleischman, this would mean an increased return of less than $300.13 19 Moreover, although Beach Fleischman would have the Court engage in a strict dollar-for- 20 dollar analysis, the risks, delays, and uncertainties associated with the Leonard Offer must be 21 considered and accounted for, and the Trustee has reasonably accounted for those risks, delays, 22 and uncertainties. (5/12/2022 Trial Tr. 20:7-18, 21:8-11). The Court finds the Trustee’s analysis 23 credible and reasonable. 24 With respect to performance under the Leonard Offer, Leonard has submitted a financial 25 statement attesting to the assets of Leonard and his wife, which he believes would be available 26 12 The Court notes that a representative of Beach Fleischman did not appear at any of the hearings dealing 27 with the objection to the Settlement or the evidentiary hearing. 13 Even assuming, for the sake of argument, that there would be no ongoing expenses or costs to the 28 Estate associated with the Leonard Offer, the monetary benefit to Beach Fleischman would be, at most, 1 to satisfy his requirements under the Indemnification. (TE 7; 5/12/2022 Trial Tr. 32:21-33:16). 2 That being said, Leonard acknowledged during testimony that he has not investigated the 3 procedure for obtaining the required bond. (5/12/2022 Trial Tr. 37:9-19; see also 5/12/2022 Trial. 4 Tr. 40:10-41:24). Thus, even assuming Leonard has the financial ability to satisfy the 5 Indemnification, issues may arise pertaining to the implementation of the bonding requirement, 6 which could result in additional delays and/or administrative expenses. 7 The Trustee has further testified that the bonding procedure proposed by Leonard would 8 in actuality provide no benefit to the Estate given that the Trustee would not be able to make final 9 distributions or close the case prior to resolution of the Krueger and Dunlap Parties’ claims, 10 including appeals. Leonard offered no testimony to refute the Trustee’s position on this issue. 11 (See 5/12/2022 Trial Tr. 25:15-26:14, 36:19-24). 12 Additionally, as compared against the Leonard Offer, the Settlement provides for a 13 complete and final resolution of litigation across multiple forums. As such, the Settlement would 14 eliminate ongoing administrative expenses stemming from all such litigation and reduce the 15 Estate’s exposure to additional costs and claims. Although the Leonard Offer purports to resolve 16 the same litigation through a purchase of claims, the Leonard Offer nevertheless leaves open the 17 possibility for additional litigation and costs that could significantly impact the Estate. The 18 Indemnification, for example, would not cover the Trustee’s ongoing operating expenses or legal 19 fees, or cover all possible claims that may be asserted by the Dunlap Parties and/or Krueger in 20 this bankruptcy case. 21 Given the negligible difference in the return to Beach Fleischman under the Leonard 22 Offer, the Court questions Beach Fleischman’s motivation in pursuing the objection, and hopes 23 that such objection was not raised solely for the purpose of assisting Leonard in the pursuit of his 24 pending claims against Secura. 25 Ultimately, the record reflects that creditors of this Estate overwhelmingly support the 26 Settlement Motion and would receive no discernable benefit from proceeding under the Leonard 27 14 The Court notes that under Arizona law, Leonard cannot singlehandedly bind his marital community. 28 A.R.S. §§ 25-214(C)(2). No evidence was presented to show that his spouse agreed to the 1 Offer. Further, as set forth above, the evidence supports that the Settlement represents a higher 2 and better return for creditors than the Leonard Offer. Given the foregoing, the Court finds that 3 the final A & C Properties factor weighs heavily in favor of approval of the Settlement. 4 VII. Conclusion 5 The A & C Properties factors weigh in favor of approval of the Settlement, and it is the 6 determination of this Court that the Trustee has met his burden of establishing that the Settlement 7 is fair, equitable, in the best interest of creditors and the Estate, represents the highest and best 8 offer for administering the Estate assets at issue, and should be approved. Based upon the 9 foregoing, the Trustee’s pursuit of the Settlement represents a proper exercise of his business 10 judgment, and the record reflects that it was entirely within the Trustee’s exercise of his business 11 judgment to reject the Leonard Offer. 12 Wherefore, based upon the foregoing, upon consideration of the totality of the 13 circumstances and the record in this case, and for good cause shown; 14 IT IS HEREBY ORDERED overruling the Leonard Objection. 15 IT IS FURTHER ORDERED granting the Settlement Motion and approving the 16 Settlement in its entirety. 17 IT IS FURTHER ORDERED authorizing the Trustee to execute any documents and 18 take such actions as are necessary to implement the Settlement. 19 IT IS FURTHER ORDERED that this Court retains jurisdiction to adjudicate any 20 disputes regarding and/or enforce the terms of this Ruling and Order and the Settlement. 21 DATED AND SIGNED ABOVE. 22 23 24 25 26 27 28